Full Test Bank Ch6 Analyzing Cash Flow And Other Financial

Entrepreneurship, 3e (Bamford)

Chapter 6 Analyzing Cash Flow and Other Financial Information

1) In a business, the actual cash that flows into the firm minus the cash that goes out of it is known as cash flow.

2) Cash flow in a business is the same as profit.

3) A firm obtains profits when its sales revenue is higher than its expenses. 

4) It is possible to sell products and have no cash coming into a company.

5) When there is a doubling in orders for a new business's products or services in a single month, it leads to an immediate increase in the cash flowing into the business.

6) If a small firm is making a profit, then the firm must have a positive cash flow.

7) To prevent a cash crunch, a company must accurately forecast its actual cash flow.

8) For a proposed new business, a financial analysis focuses exclusively on its ability to generate positive cash flow in the shortest time possible.

9) In a large firm, when there is a separation between managers and ownership, profits are a useful measure to evaluate a manager's performance.

10) In a small business, profits will demonstrate to the owner if the business is viable over the long term.

11) A general rule of thumb when examining the initial equity needs of a new venture is to base it on equity investments competitors have made into their businesses.

12) One of the fundamental realities of starting a new business is that it takes a period of time for the new venture to ramp up sales and then to obtain cash from those sales.

13) A new small business must pay its vendors by using purchase orders.

14) Float is the difference between the money going out and the money coming in.

15) A budget details all the expenses incurred by a company within a specified period.

16) A cash flow statement is the same as a budget.

17) A budget does the exact opposite of a cash flow statement.

18) In order to determine a firm's cash flow, the firm's owner must calculate the entire cash flow projection and multiply that by 150 percent to determine if the firm can meet its financial obligations.

19) A deviation analysis is a review of the differences between the predicted and the actual performance of cash flows.

20) Everything in cash flow in a small business is related to one activity: operations. 

21) When used effectively, a cash flow statement provides a small business owner with a well-respected and accepted means of displaying the ability of the company to meet its financial obligations.

22) All the expenses of a firm need to be included in the cash flow statement.

23) Revenues should be separated into as few categories as possible to provide the maximum insight to the owner.

24) A sensitivity analysis of cash flows should show the best-case and the worst-case scenarios.

25) A cash flow statement is used to describe all of the activities that generate cash and use cash during the period being examined.

26) A cash flow statement should be tailored to the information needs of a new business.

27) In the context of business tools, a sensitivity analysis examines a new firm's vulnerability to its competitors.

28) In the context of financial activities, new firms typically have only investing activities and financial activities.

29) In the context of financial tools, a commonly held view is that cash is king in an entrepreneurial business.

30) Pro forma is a term that describes estimates of what a firm's balance sheets and income statements will look like in the future.

31) A pro forma is a summary of assets and liabilities.

32) In the context of financial tools, the values of fixed assets of new firms tend to be quite vague and ballpark estimates of their values are acceptable when calculating balance sheets.

33) In the context of financial tools, a sensitivity analysis is a summary of the assets and liabilities of an entrepreneurial business.

34) Fixed assets are assets that have a physical presence, such as buildings and office equipment.

35) Current liabilities are all those debts and liabilities that a firm must pay to its investors and shareholders over a long period.

36) Long-term liabilities are debts and liabilities owed by a business that are ultimately due more than a year from the current date.

37) Current liabilities that are owed by a company need to be paid in 18 months.

38) On a balance sheet, the assets minus the liabilities of a company reflected in the balance sheet should total zero.

39) A cash flow statement measures cash flow on

A) an annual basis.

B) an accrual basis.

C) a cash basis.

D) a normalized basis.

40) In the context of cash flow analysis, ________ are a useful measure as a means to evaluate performance when there is a separation between managers and owners.

A) contracts

B) fixed assets

C) profits

D) balance sheets

41) An investment in a firm by the owner is called ________.

A) equity

B) intervention

C) severance

D) variability

42) ________ is the difference between when the money goes out and when it comes in.

A) Accounts payable

B) Difference gap

C) Equity

D) Float

43) In the context of cash flow analysis, why is a period of rapid growth considered to be one of the most dangerous times for an entrepreneurial business?

A) Because it can result in the business ordering and paying for additional orders while there is no cash coming into the firm

B) Because it is difficult to accurately forecast the cash flow of the firm in this situation

C) Because a rapid slump in sales almost always comes after a rapid and unexpected growth

D) Because the employees of small firms are rarely equipped to cope with a rise in their workload

44) A ________ projects all the expenses incurred by a business over a specified period of time.

A) cash flow statement

B) float

C) financial map

D) budget

45) A cash flow statement is the exact opposite of a ________.

A) float

B) budget

C) cash plan

D) cash flow

46) Sarah is the founder of a small business. At the start of the business year, she makes a list of all the possible expenses that the business might incur over the following year. She totals the expenses and spreads out the expenses evenly across the following 12 months. In this context of cash flow analysis, Sarah is determining the ________ for her business.

A) budget

B) cash flow statement

C) profit margins

D) equity

47) When the owner of a new firm is developing a ________, the individual should contact vendors and suppliers to ask about payment terms.

A) cash flow projection

B) cash flow statement

C) margin profit analysis

D) gap deficiency analysis

48) A ________ is the analysis of the differences between the predicted and the actual performance of a business.

A) deviation analysis

B) gap analysis

C) margin analysis

D) profit analysis

49) Mariana wants to analyze the potential viability of a new business idea. She does this by researching the sales levels of existing businesses similar to her projected business. She analyzes the information to predict sales levels that can be expected for her business at various stages of its growth. In this scenario, Mariana develops a

A) pro forma income statement.

B) break-even analysis.

C) sensitivity analysis.

D) pro forma balance sheet.

50) For a new business owner, what are the benefits of using a deviation analysis?

A) It helps develop realistic forecasts.

B) It identifies the differences between actual performances and predicted performances.

C) It allows the maximum flexibility in making changes to a new business.

D) All of these

51) In the Numi Organic Tea case study, Numi Organic Tea was founded based on the principles of

A) justice.

B) fair trade.

C) equality.

D) none of these.

52) In the Friend's Home Health case study, the cash flow statement reflected receipts from

A) actual expenses.

B) projected expenses.

C) estimated expenses.

D) all of these.

53) In the context of developing cash flow statements and budgets, what company activities are typically categorized as operations?

A) Activities related to cash flowing either in or out of a company

B) Activities related to managing a company's equity capital

C) Activities related to forecasting a company's performance

D) Activities related to developing new strategies for a company to implement

54) Identify a long-term benefit of developing accurate cash flow statements.

A) They assist a company in securing loans and credit lines in the future.

B) They reduce a company's vulnerability to competition within its market niche.

C) They improve the long-term profitability of a company.

D) They provide a significant float that allows a company great financial flexibility.

55) In the context of cash flow statements and budgets, for a new entrepreneurial firm, what is a benefit of separating cash inflows on a cash flow statement into as many categories as possible?

A) It aids in analyzing the actual revenue sources for the firm.

B) It reduces the firm's taxable income on paper.

C) It identifies weaknesses in the firm's supply chains.

D) It reduces the firm's vulnerability to undesirable market conditions.

56) A ________ is an analysis by a small business owner of the best-case and the worst-case financial scenarios.

A) gap analysis

B) deficit analysis

C) sensitivity analysis

D) forecast analysis

57) Mark, a new business owner, creates two cash flow statements for his firm. The first increases the monthly revenue of his firm by 40 percent, while the other reduces the monthly revenue by 40 percent. He compares the effect of each scenario on his firm's business to understand its financial situation. In this scenario, Mark is developing a ________.

A) gap analysis

B) balance sheet

C) sensitivity analysis

D) break-even analysis

58) In the context of financial tools, identify a difference between how traditional Fortune 500 firms and entrepreneurial ventures approach break-even analysis.

A) Traditional Fortune 500 firms calculate breakeven using profit, whereas entrepreneurial ventures calculate breakeven using cash flow.

B) Traditional Fortune 500 firms estimate breakeven based on gross profits, whereas entrepreneurial ventures estimate breakeven using net profits.

C) Traditional Fortune 500 firms calculate breakeven from returns on initial investments, whereas entrepreneurial ventures calculate breakeven from the profit margin from each sale.

D) Traditional Fortune 500 firms estimate breakeven as the point where costs equal sales, whereas entrepreneurial ventures estimate breakeven as the point where cash flow becomes positive.

59) A ________ describes estimates by a small business owner of what the balance sheets and income statements will look like in the future.

A) pro forma

B) balance sheet

C) current asset

D) cash flow

60) A ________ is a summary of the assets and liabilities of a small business.

A) pro forma

B) balance sheet

C) current asset

D) cash flow

61) A ________ can easily be converted to cash, such as accounts receivable and notes receivable.

A) pro forma

B) balance sheet

C) current asset

D) cash flow

62) Marcus performs an analysis of his new business to anticipate its future requirements. He makes a list of the various assets the firm must account for. He categorizes each asset in two lists: one for assets that can be easily converted into cash and the other for assets that have a physical presence. In this scenario, Marcus is analyzing his new business by

A) creating a balance sheet.

B) compiling an income statement.

C) compiling a break-even analysis.

D) creating a cash flow statement.

63) In the context of balance sheets, the current assets of a firm minus its current liabilities are referred to as the ________.

A) organizational budget

B) variable costs

C) working capital

D) break-even point

64) ________ are owed by a business and are ultimately due more than a year from the current date.

A) Current assets

B) Long-term liabilities

C) Current balance liabilities

D) Pro forma liabilities

65) The assets minus the liabilities of a firm reflected on the balance sheet should total

A) to half of the profits.

B) the number predicted by the pro forma balance sheet.

C) to zero.

D) the sum of current liabilities.

66) Ingrid is the owner of an entrepreneurial firm. She makes an estimate of the assets and liabilities of the firm. She then uses these estimates to plan the future activities of the firm. In this scenario, Ingrid creates a

A) time value of money graph.

B) deviation analysis.

C) cash flow statement.

D) pro forma balance sheet.

67) The focus of an income statement is on

A) profits.

B) assets.

C) liabilities.

D) cash.

68) An income statement provides both the ________ and the ________ profit figures for a firm.

A) current; long-term

B) gross; net

C) fixed; varied

D) goods; services

69) In the context of financial tools, identify a true statement about income statements.

A) Income statements summarize a firm's assets and liabilities.

B) For an entrepreneurial firm, predicting sales is key to developing income statements.

C) Income statements only estimate the net profit figures for a firm during each financial quarter.

D) When creating income statements, entrepreneurs must be liberal when estimating demand for their firms' products.

70) The ________ of money is calculated on the value of an investment in time and money, if the owner did not do the proposed venture.

A) expected inflow

B) accurate rate

C) future value

D) time value

71) ________ is a tool for the estimation of when a business's income exceeds its expenses.

A) Gap deficit analysis

B) Long-term analysis

C) Cash flow analysis

D) Break-even analysis

72) ________ costs must be paid regardless of how many products or services are sold.

A) Expected

B) Current

C) Fixed

D) Variable

73) ________ costs change according to how many goods are produced.

A) Expected

B) Current

C) Fixed

D) Variable

74) In the context of financial tools, when a new venture's net cash flow exceeds the initial investment plus the time value of the money invested, the venture is said to have achieved ________.

A) positive equity

B) entrepreneurial breakeven

C) long-term sustainability

D) positive float

75) Which of the following terms is used to describe assets that can be easily converted to cash?

A) Fixed liabilities

B) Fixed assets

C) Current assets

D) Current profits

76) An investment into a small business by owners is called ________.

77) A ________ projects all the costs that will be incurred by an organization over a specified period of time.

78) ________ is the situation where there is a difference between when the money goes out to pay business expenses and when it comes in from sales.

79) A ________ is an examination of the best-case and the worst-case cash flow scenarios.

80) A ________ analysis is an analytic tool that identifies the differences between the predicted and the actual performance of a company over time.

81) An example of a(n) ________ asset is a delivery truck used by a florist to deliver flowers to customers.

82) The focus of an income statement is on ________ rather than on cash.

83) Rent is an example of a(n) ________.

84) The term ________ simply mean that an entrepreneur estimates what the balance sheets and income statements will look like in the future.

85) Explain why cash flow is important to a new business owner.

86) How is an income statement used by a new business?

87) Why is a break-even analysis important to a new business?

88) Explain the purpose of a cash flow statement, and list five of the basic elements.

89) In the context of cash flow statements and budgets, what is a sensitivity analysis? Why is it important when developing a new business idea?

90) What is a balance sheet? How can it be used by businesses?

91) Name the two liabilities a balance sheet must account for and give examples of both.

92) Describe fixed costs and variable costs. Give one example of each type of cost.

93) What is a balance sheet? Why is it called a snapshot of a firm?